April 15 has come and gone. Hopefully you did not find yourself in sticker shock when you signed your tax return this year, but if you did you’re not alone. I have heard a lot of people say their refund was not as much as usual, or they actually owed money this year. This surprised me because I was under the impression that with the exception of those who live in high-tax states like New York or California most people received a reduction in their 2018 tax rates.
Shortly after the Trump tax cuts were passed in 2017 I had done some research on my own to see how these tax cuts would affect my family. Using back-of-the-napkin math I determined that I might save as much as $2,500 in 2018. In February I did my taxes and I’m proud to say my projection was pretty close, with my actual savings being roughly $2,250.
Since the tax savings I experienced seemed to not be the norm, I decided to dig more deeply. I discovered most people did indeed experience a reduction in their tax refund. According to the IRS, the total amount paid in refunds was down approximately 38% in 2019 compared with 2018. The total number of refunds paid was also down about 26%.
These statistics do not mean people paid more in taxes however. According to the nonpartisan Tax Policy Center the average individual taxpayer saw a tax reduction in 2018 of approximately $1,250.
This raises the question: If total tax liabilities went down for most people but so did their end-of-year refund, where did the money go? Generally speaking, the answer is people received it in small increments throughout the year in the form of reduced paycheck withholdings. While this decrease went unnoticed by many, it shouldn’t have. In fact, throughout 2018 the IRS was recommending that individuals use updated IRS withholding tables to ensure they were withholding enough federal taxes. However, since most people only fill out a W-4 form when starting a new job, this advice primarily fell on deaf ears
While nobody enjoys overpaying taxes, the refunds that are the result of such overpayments are often counted on by people as a sort of bonus check in the spring to fund a summer vacation or other discretionary purchases. The fact that for many these refunds were non-existent probably led to a few emergency budget meetings around the kitchen table.
Before you go running to your HR department to increase your withholdings because you didn’t get a fat refund this year, I would suggest breaking even is really the best outcome from a personal finance standpoint. At its core, a tax refund is really just a loan repayment to you by the federal government that you receive zero interest on. While it is nice to receive a big check from the government each April, it’s a better idea to keep the money yourself rather than waiting for the IRS to give you back what was already yours to begin with.
(Advice is general in nature and not intended for specific situations.)